Analyst: State's new drug setup still riddled with loopholes
Feb. 10, 2018
Gov. Mike DeWine is working to close loopholes that he says enabled pharmacy middlemen CVS Caremark and OptumRx to overcharge Ohio taxpayers as much as $180 million a year. But if that's to work, some experts say, he'll have to do better than the state Medicaid program did under his predecessor, John Kasich.
Amid the revelations about actions of pharmacy benefit managers in Ohio, the state Department of Medicaid said in August it would scrap the opaque system that allowed CVS Caremark and OptumRx to bill the state millions more than they paid out to pharmacists for prescription drugs for the poor and disabled.
Toward the end of 2018, the department ordered the Medicaid managed-care plans to draft new contracts with the middlemen, known as PBMs. The idea was to bring transparency to billions of dollars worth of drug transactions and remove the wiggle room the companies had to profit.
The state's lawyers, however, were dealing with masters of loopholes and wiggle room, said Linda Cahn, a New Jersey lawyer who in 1997 initiated the first class-action lawsuit against a pharmacy benefit manager. She now runs a nationwide consulting firm that helps insurance companies, unions, corporations and others write PBM contracts that close off wiggle room.
"If you write a better contract, you can eliminate a lot of this stuff," she said. Other analysts agreed.
To explain how PBMs get out of making better deals, Cahn compared PBM contracts to a fish market that advertised all fish at $7.95 per pound. But "fish" in the ads is followed by an asterisk, and in the fine print, it says that the market gets to decide what constitutes "fish." Not bluefin tuna or Chilean seabass, but tilapia and swai. In other words, you'd be overpaying for what the store called "fish" and locked out of the kinds that would be a good deal at $7.95.
For health plans, "your whole (PBM) contract is stuffed with fish 'asterisk' guarantees," Cahn said.
There was much room for loopholes in the language Ohio Medicaid used to guide managed-care plans' new contracts with PBMs, Cahn said.
Among the problems she found:
• Loose language. Medicaid is seeking to bring transparency to the process by ordering its managed care providers to enter into "pass-through" contracts with the pharmacy benefit managers. The agency is requiring the PBMs to pass through “all monies related to services provided ... including but not limited to ... all revenue received, including but not limited to pricing discounts paid to the PBM, rebates, inflationary payments and supplemental rebates.”
To the layman, that might sound airtight. But Cahn said the PBM could keep any money it says is not "related to services provided." Also, there's wiggle room in there for PBMs "to retain any financial benefits that might not be characterized as 'revenue.'" She said there are similar language problems with the guidance's disclosure and annual reporting requirements.
• No standardization of pharmacy payments. The contracts require the middleman to pass through ingredient costs and dispensing fees paid to pharmacists — plus an administrative fee of their own — to the taxpayer-funded care plans. But Cahn said there's nothing to stop CVS Caremark, the PBM to four of Ohio's five Medicaid managed-care plans, from paying its own pharmacies greater dispensing fees and ingredient costs than it does others.
• A lack of clear definitions of types of drugs. For example "specialty" drugs are generally understood to be expensive medicines used to treat complex diseases such as cancer. They can cost as much as $100,000 a month. But Cahn said PBMs often play with the definitions of those drugs in ways that promote the health of their own bottom line. She said the state should make its own list of specialty drugs, set minimum guaranteed discounts off public prices for each and create a mechanism to allow new-to-market drugs onto the list.
Asked to respond to Cahn's critique of Medicaid's contract guidance, agency spokesman Thomas Betti said, “Ohio Medicaid is in the early stages of the procurement process, which will include a top-to-bottom review of all contract provisions. Ultimately, we will produce an entirely new managed-care contract to be used following completion of the competitively bid and open procurement process. In the meantime, we believe the pharmacy pass-through contract makes significant strides towards improving transparency with drug pricing.”
CVS and OptumRx were asked to respond to the criticism that their contracts include loopholes that they use to benefit themselves. OptumRx didn't respond, and CVS didn't respond directly.
"The Dispatch has spent an inordinate amount of time and effort attempting to discredit the work we do to reduce health-care costs and improve health outcomes," T.J. Crawford, CVS Health vice president for external affairs, said in an email. "While the paper focuses on context-free data and commentary pushed by other interests, we’ll continue to focus on the $145 million pharmacy benefit managers like CVS Caremark save Ohio taxpayers annually."
A state-sponsored analysis attributes the $145 million in savings to its use of a managed-care system when compared to a fee-for-service system, and it is not attributed directly to PBMs.
Antonio Ciaccia, spokesman for the Ohio Pharmacists Association, said the PBMs want their contracts to be complicated because that benefits them financially.
"The current drug pricing system is extremely complex, which is largely by design from those who profit off of the hidden revenue streams built within," he said "Without strict oversight and properly aligned incentives, PBMs can continue to use payers and providers as their own personal cash machines."
This month, DeWine denounced the "rip-off" he said pharmacy benefit managers were perpetrating on Ohio taxpayers. He ordered the state's new Medicaid director to rebid contracts with the five managed-care organizations that hired the middlemen.
Annual pharmaceutical spending through the organizations is $2.5 billion. CVS and OptumRx say they're saving taxpayers money, but of that spending, almost 10 percent — $224 million — was the markup they charged over what they paid pharmacists, according to the analysis performed for the Medicaid department.
Similar discoveries elsewhere about pharmacy benefit managers and polls showing that lowering prescription drug prices is the public's No. 1 health priority have inspired other states and the federal government to look for ways to crack down on the middlemen.